Transferees Debate Whether to Sell or Rent – Good look at some of the factors involved in deciding whether to hold onto a former residence or sell it off.  She includes the key factors that I often discuss:

tax free residence sales

1031 exchanges

tenants from hell, as illustrated in the movie, Pacific Heights

Q:

Subject: Want to Gift to each of our Daughters

 

Hi, Kerry,

We want to gift real property to one daughter (so they can build a home and be close to us) and we want to do the same for the other daughter (equity in the home they occupy) our rent house next door – total value to each approx $14,000. 

 

We have read about IRS “gift sharing”, but don’t really understand it.  Publication 950 & Form 709 and its instructions. 

 

Could split it into two different tax years if necessary – 2005 & 2006.    We would prefer not to complicate our taxes.  Can you please advise? 

 

Thanks,

A:

The current law allows each person to gift up to $11,000 to another individual per calendar year without the need for filing a gift tax return (709) or dipping into your lifetime gift and estate tax exclusion.  This means that you can give $11,000 to each daughter, and so can your husband, for a total of $22,000 to each daughter.  You could also gift up to $11,000 each to their spouses, effectively doubling that figure.

For jointly owned property, the gifting process is fairly straight forward.  The concept of gift splitting comes into play where there is property that is owned entirely by one spouse.  In those cases, you have the option of dividing the gift as if it had been made by both spouses, and thus doubling the tax free portion.  For example, if one of the properties that you want to gift to your daughter is worth $20,000 and is just in your name, you can choose to report it on Form 709 as if you gave $10,000 worth and your husband gave $10,000 worth.

Gifts can be split into multiple years through a variety of methods, such as gifting certain percentages each year or by selling the property to the kids and then forgiving the carryback loan in $11,000 increments.  If the properties are only worth $14,000 each, neither of those approaches seems necessary.  Your and your husband’s $22,000 annual exclusion is more than enough to cover the gifts in one calendar year.

I’m not sure how familiar you are with gifting; so I will mention a few common misconceptions I hear all the time.

First, there is no deduction on your income tax returns for gifts made.  This balances out with the fact that the recipients do not have to pay any income tax on gifts that they receive.

While the gift amounts are based on the fair market values of the property at the time of the gift, the basis that the recipients will have to use to determine any capital gain or loss if they ever sell the property is the same basis as you and your husband had in the property.  For appreciated property, this means that you are also literally transferring your capital gain to the recipients.  This isn’t necessarily a bad thing.  If they are going to live in the property for at least two years, they will be able to utilize the tax free exclusion of up to $250,000 per person of gain from primary residence sales.  Even if they don’t live there, they will still be able to utilize a 1031 exchange to defer the taxation on the gain if they so choose.

Documenting the carryover basis that your daughters receive in the property can be done in a number of ways.  If Form 709 is filed with IRS to report the gift, the property’s basis has to be shown.  If the gift is under the $11,000 threshold and you choose not to file the 709, you should provide your daughters with a statement of the property’s basis so they can have it for their records.  It will come in very handy down the road when they sell the property.

I hope this clarifies the  gifting process for you.  Let us now if you want to set up a phone appointment to discuss any of this in more detail.

Kerry

Follow-Up:

Appreciate your response, Kerry. Thank you.  We will deed one acre, value of $14,000, to our daughter & son-in-law this week.

 

Have a great week!  

Reply:

I’m glad to see that the info was useful to you.

In addition to the deed, be sure to give your daughter & son-in-law the cost basis of the property so they will have that available if they ever sell it.

Kerry